Breeding for Brussels
This month’s Off the Record looks at the issue of demographic ageing and the problem of who will pay the pensions of Europe’s pensioners in the future. The topic has been well rehearsed. The solution has not. First, the problem: Europe’s population is set to shrink over the next 50 years. World Bank projections suggest that the working-age population of the present EU will drop from 230m now to 167m by 2050.
More to the point, most of this decline will be concentrated in the 12 current Euro-zone countries, where the working age population is projected to drop from 186m to 131m. The worst affected countries will be Italy, which can expect a 42% fall from 36m to 21m, followed by Spain and Germany.
The effects of this on the worker dependency ratio will be dramatic. Currently in Europe there are 35 people of pensionable age for every 100 people of working age. By 2050, on present demographic trends, there will be 75 pensioners for every 100 people of working age.
Two factors are responsible for this. The first is the increase that Europe can expect in the number of people reaching retirement age by 2030. This is the fault of the ‘baby boomers’, people who were born in the 1960s and who will be claiming their pension inheritance when they reach their 60s and 70s. The second factor is the dwindling number of workers that Europe can expect after 2030. This is the fault of the ‘baby busters’, people born in the 1970s and 1980s when European birth rates began to fall.
What is to be done? The UK has come up with one answer. The UK’s opposition work and pensions minister, David Willetts, has submitted a proposal in a pamphlet for the Centre for European Reform entitled ‘Old Europe? Demographic change and pension reform’. He proposes three solutions:
o make people work more,
o let in more immigrants,
o have more babies.
The proposal was immediately attacked as a crude appeal to women to ‘breed for Britain’ and as an attempt to put the clock back by suggesting that a woman’s place was in the home.
However, Willetts insists that critics have misunderstood what he is proposing: “Nobody wants to force women to have more children than they wish. But we have created an environment in which people are having fewer children than they aspire to.”
But would any attempt to reverse the fall in birth rates be likely to succeed, or is Europe’s population decline irreversible? We wanted your views.
The response to the most contentious proposal – that EU countries should have more babies – was surprisingly robust. The argument for an increased birth rate is, theoretically, compelling. Demographers agree that the EU population would begin to grow demonstrably if fertility rates rose from their present level of 1.4 children per woman to 1.8. An increase from a one child family to a two child family is a small price to pay for Europe’s pensions future.
Yet when we asked pension fund managers and administrators whether they thought raising the birth-rate was the only way to solve the problem of demographic ageing in Europe, those who responded to our survey gave an unequivocal ‘no’. Not one respondent agrees with this proposition.
Perhaps it was the suggestion of compulsion – never intended in the question – which drew such a negative response. Because our second proposition – that EU governments should consider introducing ‘family-friendly’ policies to enable women to have more children – gets far more support. Indeed, a definite majority (58%) agrees that this would help boost Europe’s declining birth rate.
Such policies are likely to be expensive, as Sweden discovered when it adopted family-friendly policies in the 1980s, only to halt them in the 1990s when the costs became too high.
However, our poll of pension fund managers feel that family-friendly policies are, at least, worth consideration. A majority (53%) thinks that the cost to governments and taxpayers would not be too high a price to pay.
We asked you whether you thought governments could compensate for the effects of demographic ageing by bringing more people into work – for example, by enabling mothers of young children to engage in part time work.
This idea wins strong support from our respondents. A substantial majority (84%) feels that widening the labour force is the right way to tackle the problem. However, there are some reservations about our suggestion that mothers of young children should be encouraged to look for work. One pension fund manager for example roundly rejects the idea: “Not for mothers with young children – it would be better to have a higher retirement age.”
Another strategy for widening the labour force is bringing students into the labour force earlier. In countries such as Germany, students typically do not enter the labour market until 30. Again, this idea wins strong support. A clear majority (68%) say that students should be brought into the workforce earlier.
An altogether bolder idea is that EU countries should positively encourage immigration from countries outside the EU to boost the size of their workforces. The scale of immigration this would entail is impressive. According to a study by the United Nations Population Division, the EU will need up to 159m immigrants within the next 25 years simply to maintain the current ratio between workers and retired people.
Immigration is a sensitive issue. It is hard to see how any major European countries could absorb the number of migrants that would be needed in order to offset the big demographic changes. For example, Germany’s current population of around 80m could fall to 25m by the end of this century, according
to recent projections by Deutsche Bank. In other words, Germany would need immigration equivalent to 80% of the workforce to keep its worker/pensioner ratio stable until 2050.
The EU population would grow again noticeably only if immigration increased from the current 680,000 persons per year to at least 1.2m. Whether this would be enough is also questionable. According to a recent study by the EC even a doubling of the immigration of workers from third states would not be sufficient to solve the problems of the EU social systems.
It is therefore not surprising that a majority (58%) of the pension fund managers and administrators questioned in our survey think that immigration is not the solution to demographic ageing.
A slight majority (53%) also agree that that relying on migrants to plug gaps in the labour market and boost population growth is shortsighted and can be only a temporary solution.
One possible way the EU could tackle the issue of demographic ageing is to admit new member states as quickly as possible. However, demographers point out that this is unlikely to solve the long-term problems, since most of the accession states will experience the same demographic trends as current members. This view is endorsed by our survey, A clear majority (63%) say that enlargement would not help solve Europe’s demographic problems.
Another more mischievous idea is for the EU to deliberately select countries that have a high birth rate for fast-track membership of the European Community. Turkey is the obvious candidate. The UN estimates that Turkey’s population of 66m people will expand to over 100m by 2050. Its admittance would largely solve the demographic problem by giving the EU a population of 530m people. A substantial majority (88%) is opposed to such demographic gerrymandering.
Finally, we asked whether EU governments should throw in the towel and accept that they are powerless to reverse trends such as falling fertility and demographic ageing. Here there is a surprising degree of optimism, given the foregoing responses. A clear majority (68%) of our pension fund managers feels that EU governments can and should devise strategies to reverse demographic trends.
But ‘breeding for Brussels’ is not one of them.